SYNOPSIS: Brazilian magazine interviews Krugman about the recent Currency Crisis. Gives a positive outlook but warns about the pressure to overspend.


São Paulo, Brazil

May 3, 1999

Veja –You wrote that you sympathized with President Fernando Henrique Cardoso, as he tried to do everything right, and nevertheless Brazil was severely punished by the markets after the Russian crisis. But wouldn’t the punishment have been even more severe had Brazil been hit during those periods of upheaval previous to the Real Plan [Cardoso’s anti-inflation measures, introduced when he was finance minister in 1994]?

Krugman –No doubt. But the problems that Brazil has faced help to demonstrate that, in the present world scenario, it is important but not sufficient to do your homework. The world financial system has serious defects, from which no country can escape. Not even a powerful economy such as Japan’s can regard itself as totally safe. Japan resembles the US in many respects. Strong, with stable institutions, democratic. Nevertheless it has suffered a lot. In Brazil’s case, it is possible to claim in hindsight that the Brazilian government could have launched the stabilization plan with a floating currency. It is easy to make such claims now, but at the time that did not seem so obvious or even feasible. If Cardoso had accomplished that, today he would be regarded as a economics genius. Unfortunately, reality is different. But it wasn’t his fault.

Veja –Don’t you think that the delay in devaluating the real was a mistake?

Krugman –In hindsight it may seem that it was pointless to try to defend at all costs the 1.20 real per dollar exchange rate. But one must remember that Brazil was receiving the benefits of a monetary stabilization based on a strong currency. Most analysts of Brazil’s situation reached the conclusion that it would be too risky to let the currency float. Besides, for several years Brazil was in a honeymoon with the markets and with the banks in particular. The outlook seemed solid and the benefits were real. Therefore nobody can claim now to have known the exact timing for a devaluation. Nobody knew that. That’s a story whose plot has become very familiar these days. There are few doubts concerning what happens to the economy when the currency is allowed to float. The effects are mostly positive. Politically, however, the collapse of a fixed exchange rate usually has terrible consequences, which is perhaps why governments only surrender at the last possible moment.

Veja –Do you think that Brazil is in a better situation now?

Krugman –Yes. Three very positive things are now happening in Brazil. Progress is being made towards a healthier budget, with a higher primary surplus [i.e. not including interest payments] than expected. The currency’s overvaluation is no longer a problem. Finally, the international banks have decided to reactivate Brazil’s access to credit. Together, those factors cause a change in outlook. Unless the government does something really stupid, conditions for economic recovery are there. Interest rates will fall, which will make the government’s accounts look better. The economy will tend to expand and exports, to become more competitive. I think there are reasons for optimism in Brazil, especially because the positive measures that were being taken before the crisis can be resumed. The opportunity window is open for Brazil again.

Veja –Some time ago, you wrote that economist Armínio Fraga [President of Brazil’s Central Bank] might have given privileged information to his former employer George Soros just before taking over his new post at the Central Bank. How do you evaluate that suspicion today?

Krugman –I should not have written that. I’m not an investigative journalist. I just wrote something I happened to hear about, and I still regret having published that. But I would like to say that I never thought that Fraga was dishonest. This matter belongs to the past. I hope Brazil will never again be unjustly exposed like that.

Veja –Would you invest your savings in Brazil?

Krugman – Of course. Two weeks ago it would have been even better because assets were undervalued. The Brazilian economy is in what economists call "good equilibrium, meaning things are calm and tend to get better. Note, however, that I’m not a good investment adviser. I’m well equipped for broader economic analyses where certain details are overlooked. But for investment decisions details are often more important than general principles. At the beginning of last year, for instance, I wrote that the worse was over in Indonesia and the timing was right to buy shares there. You know what happened. The country plunged into an economic crisis and it was a disaster. My economic analysis was fundamentally sound, but as investment advice it was ruinous. I lost a lot of money in Indonesia and I probably led a lot of people to as well.

Veja –You have been called the most influential economist since Johh Maynard Keynes. Has that changed the way you approach your work?

Krugman –That’s a wild exaggeration. I’m treated as a celebrity outside the US. The US, thank God, are a continental country and I’m very little known here.

Veja –But it is a fact that Malaysia followed your advice to introduce currency controls and that the Japanese cabinet discussed your idea of printing money to fight deflation…

Krugman –It wasn’t quite like that. They read and cited my writings, but the Malaysians had already decided to introduce controls on short-term investments. Basically I’m an university professor and researcher. If I wanted a position in government, I would have followed another career path. One reason why I never wanted a cabinet position is exactly what we’re talking about now. In cabinet I could not say openly what I think, because some statements from cabinet officers can have disastrous results. I don’t like it when I’m told that a recent article in Fortune caused a temporary paralysis in Indonesia’s capital markets. That may be good for the ego, but not for digestion.

Veja –To know that you have real influence on markets and governments would not make your writings less incisive?

Krugman –I agree that since last year I have been a little more careful with what I write. But I hate the idea that I may be becoming cautious. I lack this trait. As a diplomat, I would have been a failure. My advantage as economist, in a field with many brilliant people, is the option of thinking the unthinkable, the ability to distance myself from short-term financial concerns and to try to see beyond them. I never had the impression that I could control the world economy through my writings. Actually, people now tend to lose interest in what I write since now, I hope, the world economy will enter one or two years of quiet. That will be good for me. I have seen many famous economists who, in order to keep being listened to, start talking and writing things increasingly outrageous. I don’t want to play this silly role.

Veja –But if they don’t read your articles people will read somebody else’s. The crisis has caused much anxiety concerning the economy. Will it be over some day?

Krugman –I think that, outside the US, this state of constant bafflement will only give way after a radical reform of the global economic architecture. The average American does not discuss the crisis. It is not a part of his daily concerns. For most people here, it’s enough to believe that Greenspan is in charge and taking the right decisions. This paranoia that you feel in Brazil does not exist here. That’s the ideal situation, in my opinion. It must be very unpleasant to be always worried about the next economic downturn. But I see no other possible scenario if the word economy remains so dependent on the demands of the financial markets and their advocates, such as the IMF, the World Bank and the US Treasury.

Veja But aren’t those institutions exactly the ones that should promote world economic reform?

Krugman –They should, but they won’t. I see no signs that they are preparing any reform. Actually I am rather worried about what has been called Rubin Doctrine. From the point of view of economic practice it’s a very limited principle that will lead to no serious attempt to solve the vulnerability of world markets. That means we will have other global crises.

Veja Weren’t Rubin, the IMF and the World Bank crucial players during the last crisis?

Krugman –They were formidable as far as the immediate interests of the financial system are concerned. But I don’t believe that they have shown the way to the longer-term stability of those countries. When they talk about globalization, they rather mean the world integration of the financial system, especially its non-banking sector. When they suggest that some countries should dollarize their economies or adopt fixed-exchange systems such as currency boards, they’re thinking only of the American investors’ peace of mind. This kind of globalization is exhausted. It is actually delaying the arrival of the benefits of a true globalization, the creation of a world market of interacting economies generating sustainable wealth. A global market implies risks, but it also makes national economies reach new levels of efficiency. In spite of what the recent crises seem to suggest, instability is not necessarily the rule with globalization. Financial instability is threatening the integration of the real economies. It must be urgently put under control.

Veja –But who can do that?

Krugman –That’s a process that requires the participation of all agents. First, it must be admitted that the world financial system is defective. If we imagine the system as a road and countries as cars, we can say that the biggest source of instability are potholes and ill-planned curves. Of course irresponsible countries that spend more than they collect are like bad drivers. But that does not excuse the bad conditions of the roads from most of the blame. Good roads must be safe enough, even for irresponsible drivers. That’s a crucial point. Of course, on the other hand, I would like to see two, three, four countries as responsible as Chile in Latin America. That’s also a crucial point. Anything that countries can do to increase their independence from short-term capital will benefit the stability of the world financial system. But I think that’s not enough for protection against global crises. I would like to see more rigid controls to regulate the flow of external capital in certain circumstances. None of that can be done by inspiration or imposition from Washington or the G-7.

Veja –You run the risk of being misinterpreted. Many governments will love this metaphor of roads and neglect their cars…

Krugman –That risk exists and it worries me. But only a little. However, that metaphor, from my last book (The Return of Depression Economics) wasn’t meant for Brazil only. At least I intend my audience to be worldwide. Obviously, Brazil is still a country where the pressures towards spending public resources without backing are still very strong. I believe it’s one of the world’s last countries to be in such a situation. But I don’t honestly believe it will throw away the advances it has already achieved in fiscal rationalization.

Veja –In comparison with medicine or physics, has economics advanced much in the last decades?

Krugman –That’s a difficult question. I think we’ve had to face many different challenges. In the 30s, for instance, there was nothing like the high-risk funds that today rule the financial scene. But that’s not the main point. Actually, usually we did have the theoretical mechanisms to fight the most serious economic problems. The point is that they were not put into practice. Regarding our ability to predict crises, the advances were less significant. I have been active in this profession for 25 years and, in that period, I’ve seen unforeseen crises appear from time to time. That may give you an idea of how much progress this field has experienced.